The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
C. Eugene Steuerle is a senior fellow at the Urban Institute, codirector of the Tax Policy Center, and a columnist for Tax Notes Magazine. Any opinions expressed herein are solely the author's and should not be attributed to any of the organizations with which he is associated.
Note: This testimony, including all charts and tables, is available in its entirety in the Portable Document Format (PDF).
SOCIAL SECURITY REFORM
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to testify on alternatives to strengthen Social Security. I must confess my frustration at how narrowly the Social Security debate has usually been focused. It's as if the public is being asked to choose a dog from the pound by looking only at its tail—or at best its hind legs—but not the whole dog. Since Social Security was first enacted, vast changes have occurred in the economy, life expectancy, health care, the physical demands of jobs, the labor force participation of women, the percentage of women who are left on their own to both raise children and work, the age at which one can be considered old, the consumption levels of the elderly relative to the non-elderly, and poverty levels of children relative to the old—to mention only some factors. Yet we often debate Social Security as if the type of system we want in 2080 should be determined by perceptions and measures of needs of a society in 1930, or 150 years earlier.
The Social Security debate could and should be part of a larger one in which we engage our fellow citizens in choosing the best direction for society as a whole as better things happen to us in the way of longer lives and new health care goods and services. How can we really take best advantage of these new opportunities? How can we spread the gains from this increased level of well-being and wealth to create a stronger nation with opportunity for all? And how should we share the costs?
Instead, the debate is upside down. Due to the ways we have designed our programs and our budgets, every year we spend greater shares of our national income in areas where needs have declined, and then claim we don't have enough left over for areas—such as education, public safety, children, and anti-terrorism—where real needs remain and have often grown. I sometimes imagine sitting in the Ways and Means Committee room when someone from the National Institutes of Health comes in claiming to have found a cure, though expensive, for cancer. The members of committee, trapped in the logic of our current budget, find that instead of celebrating this advance, they commiserate among themselves about the increased cost for Social Security.
As a member of the baby boom generation, I remember youthful conversations among my cohort, regardless of political persuasion, that centered on what type of government we could help create to best serve society. As now scheduled, our legacy is to bequeath a government whose almost sole purpose is to finance our own consumption in retirement. Not only haven't we come close to paying for the government transfers we are scheduled to receive, but we plan to pay for them by dwindling almost to oblivion the rest of government that would serve our children and grandchildren.
With the exception of the World War II period, programs for the elderly have been absorbing ever-higher shares of national income and of the budget for almost seven decades. Define "lifetime benefits" as the value, at age 65, of Social Security and Medicare benefits as if they were sitting in a 401(k) account that would earn interest but be drawn upon over retirement. In today's dollars, lifetime benefits for an average-income couple have risen from about $195,000 in 1960 to $710,000 today ($439,000 in Social Security and $271,000 in Medicare) to over $1 million for a couple retiring in about 25 years (over $1/2 million in both Social Security and Medicare—see figure 1). We cannot provide a very large portion of the population $1/2 to $1 million packages of benefits and simultaneously encourage them to drop out of the workforce for the last third of their adult lives without affecting dramatically the services that can be provided through the budget to our children and to working families.
The impact on the budget is especially large beginning around 2008 because it is then that so many start moving from the working-age population into the retired population. Assume merely that Social Security, Medicare, and Medicaid continue on automatic pilot, that interest on the debt is paid, and that as a percent of GDP existing levels of revenues are allowed to rise only moderately and defense expenditures decline only modestly. Then by about 2015 no revenues are left for anything else—not for justice or transportation or education, not for wage subsidies or education or environmental clean-up or community development, not for the IRS or national parks—not even to turn on the lights in the Capitol. The pressure on the budget is not awaiting some magical date like 2018 or beyond. Social Security and Medicare are already spending much more than the Social Security tax for Social Security and Medicare, and even this accounting does not include all the other programs for the retired and elderly in the budget. The pressure on programs for children and working families is being felt right now, and the fight over the fiscal 2006 budget makes this glaringly apparent.
Social Security is only part of this problem, but it is an important part for four reasons:
- It sets the standard for how long we should work and who covers the costs associated with our longer lives and the new medical care we receive;
- There are many inequities and inefficiencies in Social Security that are independent of its size;
- By default (in absence of new legislation), Social Security is designed to absorb ever-larger shares of our national income, thereby squeezing out other programs, particularly discretionary expenditures, that are not treated equally in the budget process.
- A number of related employee benefit reforms would likely increase private saving, enhance the well-being of low- and average-income workers in retirement, and improve the solvency of Social Security.
Note: This testimony, including all charts and tables, is available in its entirety in the Portable Document Format (PDF).
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